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Bail-out will not end Greece’s woes

Greece’s €130 billion bail-out, approved by the finance ministers of eurozone member states in the early hours of Tuesday morning (21 February), has instilled the greatest sense of optimism yet that a line is being drawn under the worst of the sovereign-debt crisis.

Along with the signing of the inter-governmental treaty on tighter fiscal discipline and the European Central Bank’s decision to lend far greater amounts to private banks, the second rescue of the Greek economy is the third major step in two months towards bringing the crisis under control.

The turmoil in the bond markets has subsided and, while it might not yet be business as usual, eurozone decision-makers have exuded greater confidence over the past fortnight.

They realised, perhaps belatedly, that they could more forcefully dictate the terms to Greece, freed of the fear that a Greek default would prove fatal for the euro. Having the upper-hand, not just over Greece but also the financial markets, meant they were able to impose commitments on Greece’s political leaders.

Fact File

National finance ministers on Tuesday (21 February) agreed to strengthen budgetary surveillance to help improve economic discipline in the eurozone.

They approved a proposal requiring eurozone countries to submit their budget plans for the following year by 15 October, so that the European Commission can assess them. Closer monitoring of budgets for eurozone countries that receive bail-outs or that are in financial trouble was also approved. The two proposals build on last year’s ‘six-pack’ of legislation to tighten economic governance.

The agreement by finance ministers will enable Denmark, which holds the presidency of the Council of Ministers, to start negotiations with the European Parliament. The aim is to reach agreement by the end of the Danish presidency in June. The Parliament’s economic and monetary affairs committee is expected to vote on the proposals in May ahead of a plenary vote in June.

Simon Taylor

Yet there are still risks. A report on the sustainability of Greece’s debt, which formed the basis of Tuesday night’s negotiations, warned that Greece may need even more external funding if debt-cutting measures are not implemented fully. The study warned that the country’s predicament had deteriorated even in the last few months, meaning that the level of losses accepted by Greece’s private-bondholders on Tuesday had to be more than the amount agreed in October.

The eurozone’s leaders cannot afford another failed rescue. They are determined to show that they are not simply throwing good money after bad. They will increase the EU presence on the ground in Greece to ensure full implementation of bail-out conditions.

But the success of the bail-out may depend less on politics or economics than on a force even stronger than the financial markets: the people. Greek citizens have already demonstrated their anger over what they see as German-imposed austerity, and, with far deeper cuts to come, this agreement among ministers is unlikely to be the end of the story.